Maria Vonotna
November was a month to remember for biotech stocks as gene therapy developers outperformed and pharma giants looked for M&A opportunities in the industry amid an improving macro setup.
SPDR S&P Biotech ETF (NYSEARCA:XBI), representing over 130 biotech stocks, climbed ~14% while the S&P 500 added only ~9%. Elsewhere in healthcare, the SPDR S&P Pharmaceuticals ETF, which measures pharma stocks, gained only ~3%, and the broader health sector rose ~5%, as indicated by the Health Care Select Sector SPDR Fund ETF (XLV).
While healthcare posted the best monthly performance since October 2022 in November, for biotechs, it was the best month since November 2020. However, the industry remains in the doldrums, with a ~55% selloff from its February 2021 peak compared to the ~14% rise in the healthcare sector.
Mizuho healthcare equity strategist Jared Holz attributed the recent gains to a broader rally among small-cap stocks and a growing consensus among market participants that interest rates won’t rise any further.
In addition to higher funding costs, an adverse interest rate environment impacts biotechs as rising Treasury yields hurt the present value of their future cashflows, driving down DCF-derived valuations. In a note to investors, Goldman Sachs analyst Asad Haider said in early October that the XBI “has largely become an inverse rates proxy.”
Still, there were pockets of optimism in biotech space in November. Gene therapy developers, including CRISPR Therapeutics (NASDAQ:CRSP) and Beam Therapeutics (NASDAQ:BEAM), were among notable gainers in the month.
In mid-November, Swiss-based CRISPR (CRSP) and its U.S. partner Vertex Pharmaceuticals (VRTX) won the U.K. nod for their CRISPR-based drug exa-cel for sickle cell disease and beta-thalassemia, marking the world’s first regulatory approval of a gene-editing therapy.
Goldman Sachs’ Haider indicated a challenging outlook for biotechs, citing “an uneven path for interest rates in the month ahead” and arguing that “the longer-term direction of travel could remain uneven and challenging.”
However, citing an improving macro setup and renewed interest among investors, BTIG sounded more optimistic toward biotech as 2023 winds down.
“We see 2024 as a potentially better year for the sector with an improving macro backdrop and a return of interest to high-growth sectors such as biotech,” analyst Justin Zelin wrote in a note on Friday.
“We see investors currently missing the fact that the fundamentals of the industry remain intact, with the engine of innovation running strong in pharma and biotech,” Zelin added.
More catalysts await gene editing space this year as a potential U.S. approval of exa-cel is expected by Dec. 8 after a group of independent advisors to the FDA issued positive views on a marketing application for the treatment in October.
Big Pharma is also taking note. M&A interest in the sector spiked this month as AbbVie (ABBV) offered $10.1B to acquire cancer drugmaker ImmunoGen (NASDAQ:IMGN). The developer of antibody-drug conjugates ended up being the best-performing biotech stock in November.
AbbVie’s (ABBV) all-cash deal adds to Eli Lilly’s (LLY) $1.4B bid to add radiotherapy developer Point Biopharma (PNT) and Bristol Myers Squib’s (BMY) $4.8B offer to buy the cancer drugmaker Mirati Therapeutics (MRTX) in October.
